Many retirees are finding themselves in need of cash as retirement can stretch into 20 or 30 years – or longer. A possible solution is the reverse mortgage, which is getting another look from financial experts. This type of loan can be a safe income source that that homeowners short on savings who want to stay in their own homes as long as possible should put into place as soon as they become eligible at age 62. If the retiree is over 62, the next best time is as soon as possible.
In a recent article in TIME Magazine, Wade Pfau, professor of retirement income at the American College of Financial Services states, “The strategic use of home equity in a retirement-income plan is the next hot topic.”
About 65% of owner-occupied homes owned by folks 65 and older are mortgage-free, according to the Census Bureau. Many other elder homeowners have substantial equity to utilize in a retirement-income time of need, such as paying for in-home care. Yet even when many retirees face the risk of running out of money, $12 trillion in home equity continues to just sit there for “peace of mind” or to preserve a financial legacy for grown children.
The probability of not running out of money for 30 years of retirement for homeowners who set up a reverse-mortgage line of credit and don’t use it until they run out of other income or savings is 90%. The probability of not running out of money drops to 70% if homeowners do nothing until their other funds are exhausted.
What is a reverse mortgage? It is a loan that allows you to turn your home equity into cash. You can take the money as line of credit, a monthly payment, or a lump sum. You must own the home as your primary residence and continue to pay property taxes and insurance. When the homeowner moves out due to death or a change of circumstances, the house is sold and the homeowner or their heirs receive any proceeds in excess of the loan balance.
Most reverse mortgage loans fall under the federal Home Equity Conversion Mortgage (HECM) program, which is the only one most people should consider. Using HECM loans, you have the choice how you want to take the money out. This has advantages over the traditional home/equity line of credit. You make no monthly payments out of pocket, and the lender cannot cut or close your credit line as long as you stick to the loan terms.
For more information, contact a mortgage lender who specializes in reverse mortgages.